When planning for the future, many people who have life insurance think that’s the best way to take care of their loved ones. They buy a life insurance policy or get one through work, select their beneficiaries, and don’t do any additional end-of-life planning.
What else is left to do?
As it turns out, there’s quite a lot to think about when you’re evaluating life insurance and a traditional will. It’s important to know that life insurance and estate planning are both financial planning tools that should be used in conjunction with each other. While they serve different purposes, they are both crucial in ensuring that your loved ones are taken care of after you pass away.
What is Estate Planning?
Estate planning is generally defined as making a plan for the distribution of your assets after your death. It involves creating a will or trust, naming heirs and beneficiaries, and appointing an executor to carry out your wishes. The primary goal of estate planning is to ensure that your assets are distributed according to your wishes and that your loved ones are taken care of after you pass away.
What is a Will?
If you’re reading this then congratulations, you are already estate planning! Every legal expert will tell you that the first thing you need to do when you make an estate plan is write a will. A will is a legal document that states your final wishes and how your heirs will receive your assets after your death. Even if you don't have many assets and no matter how young and healthy you seem to be, you still need a will. It saves your family time because it makes the probate process easier and faster. It also ensures that you have a say in what happens to your assets. Don’t let anyone convince you that life insurance is a substitute for a will. Thankfully, you can make one right now using FastWill.
A will differs from an insurance policy in several key ways:
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With a will, you get to name an executor, who will be responsible for carrying out your wishes. An insurance policy is just a cash payment, but with a will, you’ll have a person making all of the decisions that require judgment, such as paying off your taxes and debts. This is really helpful if you have complex asset issues, like an ongoing business or investment portfolio that require a human being to continue to manage and distribute the assets.
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A will can also be used to name a guardian for minor children. That’s reason enough to have a will, to make sure that you provide for your minor children.
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Wills handle every aspect of your estate. You can use wills to tie together all of the things in your estate plan, including establishing trusts and addressing other important issues related to your estate.
What is Life Insurance?
Life insurance, on the other hand, is a financial product that pays out a lump sum of money to your beneficiaries after you die. It is designed to provide financial support to your loved ones, separate and apart from what you left them in your will. Life insurance policies can be used to cover final expenses, pay off debts, or provide ongoing financial support for your family. Obviously, FastWill recommends that you have a will, but that doesn’t mean you shouldn’t get life insurance. If you have a policy or are considering one, it’s generally a good investment. Here’s one big reason why:
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Life insurance provides liquidity to your estate. When you pass away, your assets become part of your estate. But some of your assets, like real estate or investment accounts, can take time to sell or distribute. Life insurance provides immediate cash flow to your beneficiaries. They can use this immediately to cover funeral expenses or living expenses. There’s also no limitation on what they can do with this money, which means it’s a flexible option.
There are other ways life insurance can help you plan your estate:
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Life insurance can also be used to equalize inheritances. If you have multiple heirs, you may want to ensure that each of them receives an equal share of your estate. However, if your assets are tied up in certain types of assets, such as real estate or a business, it might be hard to divide the assets equally especially in the short term. Life insurance can be used to provide additional funds to the heirs who receive less from the other assets.
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Life insurance can minimize estate taxes. Life insurance proceeds are generally not subject to income tax, and if structured properly, they may not be subject to estate tax either. This can help to preserve more of your estate for your beneficiaries. If this is of particular interest to you, it’s always helpful to speak with a tax professional.
Life Insurance Plus a Trust
Life insurance can also be used to fund a trust. A trust is a legal arrangement in which a trustee holds and manages assets on behalf of beneficiaries. If you use a trust, you need to fund it with assets, like investments, real estate or cash. Life insurance proceeds are another way to fund a trust, which can provide ongoing financial support to your loved ones. By using life insurance to fund a trust, you can ensure that your beneficiaries have access to money and also bypass probate and estate taxes.
Conclusion
Life insurance and estate planning are two important financial planning tools that work best when they are used together. Life insurance can play a critical role in estate planning by providing liquidity, equalizing inheritances, minimizing estate taxes, and funding a trust. An insurance policy doesn’t give you the same amount of control over asset distribution, nor does it allow for any ongoing management of a will or a trust. That’s why you should simply use FastWill to set up a will and trust - these are the primary ways for you to exert control over your estate.
